The Costco effect

During my visit to Freddy last week several people asked me about the Costco effect. I also read about local gas retailers in the Freddy area demanding the government set a minimum price for gas as Costco had eaten into their business model. I had blogged about this years ago but the subject is now on topic in the province’s capital city.

A while back I mentioned the grass roots campaign to attract Walmart to the Miramichi. Before Walmart decided to move into small markets, there was a lady in the ‘chi who was adamant she was going to attract Walmart to her community. There was a petition with thousands of names on it sent to Walmart – and she got her wish. It was a remarkable display of public interest in attracting an industry and it made me wonder how we could possible leverage this kind of thing to attract other kinds of companies – manufacturers for example.

Anyway, Miramichi got its Walmart and has seen a fairly sharp rise in overall retail sales in the region since. However, there has been a 15 percent decline in the number of retail business establishments (2003-2010). That is a net lost of more than 50 small retailers even though retail sales overall are on the rise.

The same kind of effect happened in Moncton when Costco arrived in the 1990s. That firm’s business model relies on enormous volume and that volume has to come from somewhere.

I am not a big fan of retail from the perspective of economic development. It’s almost entirely reliant on local demand and relatively low paying (although Costco is said to pay the highest wages in the industry). Some have argued that niche retail can attract people from outside the community – fair enough – but it’s not a major driver of economic growth.

And there are examples of smaller communities fighting fiercely against big box stores. I remember battles in the early 2000s along the coast of Maine as certain residents were looking to keep Walmart out of their little communities of 4,000 or 5,000 people.

In the end, I think Costco is a positive influence. People looking to move to Fredericton from any larger urban centre will expect Costco. It’s not a huge deal but it matters.

And I categorically disagree with the government intervening in the retail market. That is almost the last bastion of free market activity – I can point to very little government grants and loans or direct influence in the retail sector in New Brunswick – and that is a good thing.

I am sympathetic to those retailers in Freddy that have been hit by Costco and the nice little downtown core of shops might suffer but in the end the ‘greater good’ is what matters here.

Smaller retailers need to niche – find products/services the big guys don’t care about and pile on levels of service and other differentiation the big guys find hard to replicate.